Since the past two weeks, hotel stocks have been very active on the bourses. Investor sentiment towards the hotel sector seems to be generating interest once again. In the last four years investors dumped hotel stocks as the prospects for the sector were not that bright.
This year however things have changed. The year has started on a good note with tourist arrivals showing strong positive growth during the year. For the period April-October 2000 tourist arrivals grew by 6% YoY. The main reasons for the improvement in the tourism sector have been the political stability factor, strong foreign direct inflows and rupee depreciation.
All this has resulted in buoyant occupancy rates in the current year especially for the five star metro hotels. Indian Hotels Company Ltd (IHCL), and EIH Ltd, have reported a spurt in share prices in the past few months. IHCL's Mumbai and Delhi hotels contribute to around 67% of the company's profits while for EIH its Mumbai and Delhi hotels contribute to around 80% of the company's profits. Hence any improvement in metro hotel occupancy rates has a positive impact on these companies bottomline.
EIH's stock price also ran up due to rumours of a takeover, while IHCL's stock held steady on better prospects for the current year.
The trigger to these stocks in the past two weeks is strong profit growth expectations in the 3QFY01, as occupancy rates rose sharply in the month of November 2000. The government's decision to go ahead with ITDC's disinvestment too has resulted in higher interest in these stocks. These two hotel companies are strong contenders for ITDC's disinvestment as they have loads of experience and blue chip brand name for turning around ITDC's loss making hotels.
Besides these they also have large capital expenditure plans and will be in a position to take on these hotels in their balance sheets. As of now the government has decided to disinvest only 9 hotels of the total 26 hotels that ITDC holds. Of these 3 properties are likely to be on a long term lease basis.
IHCL is keen to swap its 10% stake for 3 properties of ITDC. Most of the privately run hotel chains are keen on ITDC's prime hotels located in the city of Delhi. Even if IHCL gets few properties on a long-term lease basis it would be benefit it. If IHCL was to buy out a new hotel in Delhi, the cost of construction for a five star 300 room hotel works out to Rs 1.5 bn (Rs 5 m per room). This is excluding the cost of land.
Though these stocks have run up recently, however they continue to still look attractive. The reasons being occupancy rates continue to look buoyant and room supply in metros is coming up very slowly. On valuations, IHCL is trading at a 55% discount to its NAV of Rs 541 per share and EIH is trading at a 40% discount to its NAV of Rs 353 per share.
On a price to earnings multiple IHCL looks more attractive as compared to EIH. On the current price of Rs 243, IHCL is trading at 7.8x FY02E EPS of Rs 31.1, while EIH on the current price of Rs 214 is trading at 9.9x FY02E EPS of Rs 21.7.